Low growth, high inflation, chronic fiscal deficits, stagnant exports and declining reserves together have raised serious concerns for both fiscal sustainability and external viability. But what is even more disturbing is Pakistan’s energy crisis, which has become over years the biggest constraint for economic growth and social development. Defying solutions for long, it has worsened the state of public finances in a country of 180 million where less than one percent pay tax.

In the fiscal year ended June 2013, economic performance had slackened further with GDP growth estimated at not more than 3.5 per cent, inflation hovering close to double digit, and reserves declining rapidly – by some three billion dollars from an already perilous level of 10.8 billion at the end of June 2012 to 7.9 billion at the end of February 2013. Poor exports, lower financial inflows and higher debt amortization payments account for the continuing decline.

The 231-billion dollar economy had lost its growth momentum over the years affecting development outcomes. In its Global Growth Prospects Report 2013, the World Bank spoke of “persistence of conflicts in border areas and security challenges throughout the country as a reality that affects all aspects of life in Pakistan and impedes development.”

The weaknesses in the energy sector, with the widespread power outages and black-outs in Karachi and several other parts of Pakistan, had been the focus in reform programmes proposed in the past by international financial institutions aiding Pakistan - IMF, World Bank and ADB. Whatever the factors, Pakistan has not been able to make any headway on this front and the crisis has only been deepening.

Indeed, the power crisis was said to be the major factor for the defeat of the PPP-led Government in the May elections while a promise to end power shortages and improve public finances greatly helped Nawaz Sharif’s party, PML(N) in its triumph. The new government has duly conveyed its intentions in this regard in the Budget for Fiscal 2014 hurriedly presented on June 14 before the start of the new fiscal year on July 1.

But Pakistan’s economic problems are deeply structural and not amenable to early resolution. These have been accentuated by a continuing deterioration in the power sector, which has not only curbed growth but also caused financial and economic instability.

Power outages are estimated to cut growth by 2 percentage points.

The new government blamed its predecessor for the economic mess and the growth slowdown to a 3 per cent average over the last five years. The PPP Government had also abandoned in 2011 the earlier IMF’s Extended Fund Facility (EFF)of November 2008 for a total of 11.3 billion dollars. Having drawn a big chunk of that loan, Pakistan has to make provision for repayment instalments.

It is in a rather gloomy setting but with a new Government headed by Nawaz Sharif, who was somewhat averse to seeking recourse to IMF borrowings, that an IMF mission visited Pakistan from June 19 to July 2 for Article IV consultations. It held policy discussions with authorities about possible Fund support for government’s intended reforms. They reached a” staff-level agreement on the key elements of an economic reform programme that is strongly owned by the authorities” and that could be supported by a 36-month EEF arrangement for 5.3 billion dollars, an IMF release said.

Notwithstanding IMF’s post-crisis lessening of rigours attached to its lending facilities, a set of pre-conditions have been set for this new three-year loan which would be finalised and presented to IMF Board in early September. The Board would consider the proposed arrangement “subject to the timely completion of prior actions to be taken by the authorities”. In fact, the IMF support should help to replenish the reserves of the State Bank of Pakistan to some extent so that it could also meet some repayments to the Fund on the earlier loan.

In the energy sector, IMF said, technical and financial had led to large-scale power outages, which have depressed output and imposed hardship on the public at large. For its part, the new Government has agreed to take more steps beyond those spelt out in its budget for fiscal consolidation, with cuts in spending by eliminating some subsidies and removing tax loopholes while it would also raise more money through sell-off of energy asserts.

Finance Minister Ishaq Dar, who led the Pakistani delegation during the two weeks of negotiations with IMF, sought to clarify the government’s position saying, “We have not carried the begging bowl in our hands (to IMF) nor are we getting a grant.” Prime Minister Nawaz Sharif faces many economic challenges in his present third term, of which the most immediate worry is to sort out the country’s energy conundrum.

At present, the power sector receipts do not cover costs and carries a large loss for every unit of power sold. Pakistan has to address the debt accumulated in the sector, rationalise tariffs, and promote investment for energy generation and modernisation. Such steps, IMF notes, would help to mitigate the hardship of electricity load-shedding, improve fiscal balance and help boost growth of the economy.

In its sum-up of the economy after discussions with Pakistan authorities, IMF said weak performance in large public enterprises constituted a drag on the public finances and on economic growth. Capital inflows have also been insufficient to finance even a modest current account deficit of around one per cent of GDP, leading to large reduction in international reserves.

While the 2013-14 budget is a step in the right direction in moving toward sustainable fiscal and external positions, IMF noted, the government has agreed to take additional steps to achieve a substantial deficit reduction at the beginning of the program during the fiscal 2014, which has just begun.

The mission and the authorities agreed on the need for a sustained improvement in tax collections as well as a significant widening of the tax base and a more equitably shared tax burden, including through a phase-out of all existing statutory regulatory orders (SROs) and other measures which grant special rates and tax exemptions. On the expenditure side, untargeted subsidies that disproportionately benefit the well-off are to be phased-out, while fully protecting the most vulnerable members of society through targeted assistance.

IMF said energy reforms would need to be complemented by structural reforms in the areas of trade, public sector enterprises, and the business climate to encourage higher investment. “Restructuring and privatization of public enterprises—including those in the energy sector—are intended to help restore fiscal stability as well as boosting investor confidence in Pakistan’s future economic prospects and opportunities, leading to higher growth and job creation”.

According to financial institutions, Pakistan needs to move toward 7 per cent growth rate over the medium term (against the average of 3 per cent in recent years) in order to generate adequate employment and achieve meaningful poverty reduction. An IMF loan for a country normally evokes broader international support. Pakistan has been getting substantial assistance, largely on soft terms, from both ADB and the World Bank.

IMF said it would remain committed to providing financial resources and technical assistance for Pakistan and its people to “face up to the challenges”. It had projected Pakistan’s GDP growth at 3.7 and 3.6 per cent in 2013 and 2014 and inflation to remain high at around 9 to 10 per cent in these two years. (IPA Service)